Finding money and capital is obviously a big deal as real estate investors. Deals and money are the two big needs that investors have. In today’s economy, if you don’t have a system in place or a team to take care of those for you, good luck beating out the investors that do. Today Matt will tell us why raising private money is important and how we can do it ourselves.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: How are you doing, Best Ever listeners? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday, where we’re gonna talk about a particular situation, so that when you come across it or if you come across it, or perhaps you’re in it right now, you’ll know how to handle it.

This particular situation is if you are needing to raise private capital, our guest Matt Faircloth – you recognize his name, he’s been on the show multiple times before – just released a book called Raising Private Capital, and he’s gonna talk to us about how to do that from start to finish, and some of the nuances of it. How are you doing, Matt?

Matt Faircloth: I am awesome, Joe. It is such an honor to be here, thank you for having me.

Joe Fairless: Grateful that you are on the show again. Just as a refresher, Best Ever listeners, Matt is the co-founder and president of the DeRosa Group. Under Matt’s leadership, DeRosa has completed over 30 million buckaroos in real estate transactions involving private capital. As I mentioned, he’s the co-author of a new book coming that was just released, Raising Private Capital.

He’s been interviewed on this show three times prior: episode 606, episode 616, and episode 1373. Based in Trenton, New Jersey. With that being said, how about you give just a refresher of your background so we have some context for your area of expertise in raising private capital?

Matt Faircloth: Sure, absolutely. I got started in real estate in 2005 when I quit my job. I was working for a company called Ingersoll Rand, which is a heavy equipment manufacturer… I quit my job with them in 2005 and started doing whatever we’d call smaller real estate transactions; I lived in a rental before I quit my job, like a house-hack, and then just did smaller flips and just grew my way up into larger real estate.

I bought a duplex in Philadelphia, sold it, then transitioned into two four-unit apartment buildings in Ewing, New Jersey, and then slowly expanded that portfolio of two four-units and bought several more four-units on the block. I pretty much made it the equivalent of a 20-unit apartment complex. I just really grew up through residential landlording in the small stuff, and then grew into the larger deals.

In the downturn we ended up getting knocked on our heels (there were a lot of people that did) and we were into a lot of flips at the time, so we converted a lot of those into rentals. We did some commercial real estate transactions while the dust was settling, and then started really raising money.

As the markets started to come back in 2011, we started raising private capital, built on the track record we had from the last six years of investing in real estate, we started raising private capital from investors… So from 2011 until now, almost everything that we do involves some sort of private capital because we’ve got a lot of folks that come to us and wanna get involved.

We still do fix and flips, we still do some smaller projects, but we also do larger projects. The most recent large project was a 198-unit apartment complex in North Carolina.

Joe Fairless: Cool. So you’ve been involved in raising private capital on many projects. For a Best Ever listener who has not raised private capital and is not interested in learning about raising private capital – for whatever reason – why is it important in your opinion to know about how to raise private capital?

Matt Faircloth: Well, I think that raising private money, somehow or another, first of all exposes us as investors, as the action-takers on these deals. In the book that I wrote I call it deal-provider, because we go out and we find the deal and we bring it to the folks who put the money into the deal, called the cash-provider… So I talk about the deal-providers and the cash-providers.

Private capital is important to a deal provider because it exposes us to larger deals. It allows us to do bigger projects. I closed on a 198-unit deal with other people’s money and I was able to get ownership for myself and I was able to give them exposure to the profitability of that deal also, which is another reason why private capital is important – because it gives people in my network or that approach me in my circles that wanna invest, it gives them access to a completely different investment, that’s different than what can be found on Wall-Street, it’s different than what can be found through them going out and maybe doing their own deals, or going out and buying smaller assets… They get to benefit from the things that show up on larger assets; so private capital exposes both parties, the deal-provider and the cash-provider to the benefits of larger assets.

Joe Fairless: But why does that matter? Is it that larger deals make you more money? Because otherwise, if it’s a larger deal – okay, bragging rights; that’s cool… But what’s the point of going larger or bring in new investors if it doesn’t make you actually more money to go through that whole process?

Matt Faircloth: It enables us to pound our chests even more, Joe… That’s what it does.

Joe Fairless: [laughs]

Matt Faircloth: [unintelligible [00:05:54].19] absolutely just shout my name from the mountaintop…? Absolutely not. The larger deals have benefits to them, such as – I’ll give just a few examples, and I think a lot of your listeners know that it’s specifically apartment buildings; that’s what we’re talking about, and that’s what I focus on, and I know it’s what your company does as well, and perhaps a lot of your listeners do, too.

Apartment buildings specifically have specific benefits. The deal we bought in North Carolina – I’ll just keep using that as an example, because it’s one that we’ve just finished… That property has a four-person payroll allocation, meaning that building has four employees whose sole purpose in their career is to maintain that building. It’s got two maintenance guys and two office staff… Whereas if we had bought a smaller asset, the property manager may be torn between managing my property, or maybe is over-stretched, it’s managing other assets they may have.

Larger deals allow us to normalize expenses, and also there’s all kinds of other benefits we don’t wanna get into today about forced appreciation, meaning I can make the value of the building go up through making some improvements, I can increase rents to make the value of the building go up and all that… So all those scalabilities that show up on larger assets benefit both parties, so that’s why. It’s because the economies work better on larger deals, for many reasons.

Joe Fairless: You’re doing some small deals on the fix and flip stuff still, and you have in the past, and you’re doing large deals like the one that you just mentioned in North Carolina… What are the differences in raising money on a small deal versus a large deal?

Matt Faircloth: Well, we have people that do self-directed IRA investments in large deals, and a lot of people do that with self-directed IRA money; that said, the self-directed IRA, because of the way it operates, is actually a better short-term vehicle for investing. So we offer short-term investment assets. If you wanna get into a deal that lasts six months, or a deal that lasts a year, you can do that and then take all the proceeds that you make – let’s say somebody puts $100,000 into a fix and flip – I pay them 10% interest, it takes me six months to complete the deal, so they make half of 10%… For six months, they make $5,000. If that was not a self-directed IRA, if that was out of their own cash, they’d have to pay tax on that 5k and then they could do something with it, or allocate for taxes, or whatever.

Because it’s a self-directed IRA, they can take all those proceeds and roll them back into another project and compound the interest. So in the interest of scaling someone’s retirement plan up on an exponential curve very quickly, short-term projects work really well.

So that’s one of the reasons we provide those as an option for those who wanna invest with us. Also, just over the years of being in the business, we’ve never been really a one-trick pony; we’ve always been in a lot of different things. I built up a section of my company that’s dedicated to fix and flips, so we can do fix and flips, and also with people that approach us with IRAs, I explain to them what I’ve just explained to you about what I consider a short-term loan.

On the other side, if somebody has cash, there’s major tax benefits they get from holding a share of an apartment building that they get by just investing in their own name, or just in cash in the property.

Joe Fairless: What you’ve just described is short-term projects, fix and flips, versus long-term projects. Now, separate from that, what are the differences between bringing private investors in a smaller deal, versus a larger deal?

Matt Faircloth: Well, there’s different documents that you have to do, different conversations that you have to have, and it really has to do, Joe, with really seeking to understand — when an investor calls a potential deal provider, or when an investor calls one of your listeners and says “Hey listen, I have some extra money I’d like to put to work in real estate. Can you help me?”

Instead of automatically puking on them and telling them about deals you have, really understanding that investor’s goals, knowing when retirement time looks like for them, and getting to really know where they wanna go financially, are they trying to plan for college, are they trying to buy a vacation home? And everything like that.

I’ve got one guy that invests with me whose goal in the next five years is just to move back to his home country of Argentina, and wants to make enough money investing through his real estate assets that he can live off of his assets when he’s in Argentina. So now that I understand that, I have a better short of helping him get there. It really has to do with understanding their goals… And then the deal, and then the documentation and the legal work to protect them, and everything like that. But first and foremost, understanding where they come from, where they’re going, and then I can offer them a few things that we do that might plug into their goal set.

Joe Fairless: When does it not make sense to do a syndication and instead you do a joint venture?

Matt Faircloth: Well, I had a long talk with my SEC attorney [unintelligible [00:10:29].28] The deal has to qualify as a security, and there’s four things you have to satisfy to be a security; the biggest one is that it has to be invested in a common enterprise… Meaning if Joe Fairless lends Matt Faircloth money, we are not in a common enterprise; you are actually an adversary of mine. We’re not on the same side of the deal. We don’t win together. And believe it or not — you would think that the lender would win if he just gets his interest back, but the lender has certain rights that are not in the borrower’s best interest, such as foreclosure, such as taking the property back, such as putting a lien on the property… All of these things.

So a loan in itself does not meet one of the criteria for the SEC as defining it as a security, so right there, if you loan me money individually, then that’s not a security, that’s not an SEC activity.

There’s other things out there that have to do with passive investments, meaning that the investors actually have involvement in the deal, or they are 100% passive, with their hands off, and not doing anything… But the deal has to meet all four of those of prongs which are described in the book; the biggest one is that it has to be a common enterprise, meaning you’ve gotta be on the same side of the deal.

Joe Fairless: What about a dollar threshold where financially it does or doesn’t make sense to engage a securities attorney because the deal isn’t a certain size? Have you ever come across that?

Matt Faircloth: Yeah… When we first got started, my first equity deal was a guy who put in $50,000. This is something that I talk about further in the book, but I think that some of your listeners could get started with. We had a guy with 50k, and we took that $50,000 and we bought a couple of single-family homes with it.

Now, he was not 100% passive, and I don’t recommend that if people are gonna put that kind of money into your business… If that’s all they’re putting in, if that’s all the money you’re raising, give that investor something to do; get them to be somewhat active.

This guy was just auditing my books on a weekly conference call, just talking briefly about what we’re doing with the deal… But it allowed me to cut my teeth in equity investing, instead of trying to raise a couple of million for a big apartment deal that needed an attorney; I could do a smaller deal. So I grew up through small equity investments, and I was careful just to give those investors some type of an activity to be involved with; it precluded from being a security and an SEC-regulated activity.

To answer your question about how big does the deal need to get before the SEC attorneys get involved – I’ve rarely seen them involved in anything below about a million bucks. That’s when it makes sense to bring them in, because of the cost of those SEC attorneys.

Joe Fairless: A million-dollar purchase price, or raise?

Matt Faircloth: A million in equity.

Joe Fairless: A million dollars in equity, got it. So the purchase price, unless you’re paying all cash, would be significantly larger than that.

Matt Faircloth: Right.

Joe Fairless: Okay. What does a securities attorney cost per hour?

Matt Faircloth: Well, unfortunately we don’t pay them by the hour; it’s probably a good thing we don’t pay them by the hour… Because anytime I’m paying a lawyer by the hour, I start looking at my watch whenever I’m talking to him on the phone; it’s like “Are you charging me? You sent me this e-mail… Are you charging me right now?”

Every SEC attorney I’ve ever dealt with gives a flat rate, and I recommend to your listeners that they try and get a flat rate out of a lawyer whatever that lawyer is doing for them. Anytime I’ve gotten charged by the hour with a lawyer, all of a sudden I end up having to fall out of my chair when I see their bill.

Joe Fairless: [laughs]

Matt Faircloth: You’re laughing because it’s happened to you, Joe.

Joe Fairless: Absolutely, yeah.

Matt Faircloth: So I’ve found their fees to be in the realm of 10k-15k, give or take…

Joe Fairless: For what?

Matt Faircloth: For syndication, to do a full SEC filing. That includes your operating agreement, your subscription agreements, investor questionnaires, paperwork to the SEC, filing docs with the states, and stuff like that. Because each state that each investor lives in also needs to get notified of your deal, as well. So it’s work, they earn it.

Joe Fairless: Absolutely. They provide a lot of value, that’s for darn sure. Your book is titled Raising Private Capital, and you walk the reader from start to finish through how to raise private capital. From a high level, walk us through the outline of how it’s structured.

Matt Faircloth: The book, you mean.

Joe Fairless: Yeah, the book. Because I assume that’s also how raising private capital would flow, so…

Matt Faircloth: Of course. In the book, I talk in the beginning about why private capital is even important, so “Why should I even think about this stuff?” And second, I talk about the pre-requisites to raising private capital, because I’m not one that subscribes to the mentality that someone should walk into this business with no experience, none of their own money, no track record, no contacts, no deals under their belt, and say “I’m gonna go forth and start raising three million dollars for people to go and invest in my apartment building deal.”

So I developed a list of prerequisites that I feel like people need to have to be successful in raising private money. That’s a whole chapter on that.

Then we talk about, as I said, the lingo of deal-provider, cash-provider. We talk about cash-providers, we talk about where to look in your own network. I firmly believe that people should start looking in their own network – going in front of family, going in front of friends, doing Facebook postings, and stuff like that… Doing whatever they can to broadcast themselves in their immediate circles to find people. You can eventually get there, but I think that people should start with people that like and trust them because they’re them, not because of their gargantuan real estate juggernauts, or anything like that.

They should start with people that just like them, because they’re Joe Smith, or whatever, because they are who they are. So we talk about how to look in your own network for money.

Then we talk about the role of the deal provider, and I present the deal provider to be really a custodian of other people’s money; in a way, you’re responsible for their capital, and I talk about what that role looks like.

We talk about how to structure deals, we talk about many different types of deals that you can get into… Of course, debt and equity, as I’ve mentioned before, but borrowing money or putting money into projects. I give a lot of case studies on small deals that I did, large deals that I did; I turn myself in and talk about deals that I did and didn’t work out too well, and times that I’ve lost money on deals – that’s in the book. So this isn’t just like a Matt Faircloth bragging session, I promise. In some ways, writing the book was therapy.

And then, in the end, we get into what I think a lot of investors don’t think of as much, which is how to unwind the deal. Investors focus a lot on “Let me find the opportunity, let me find the money. Now let me close.” But then once you’re in the deal, there’s a chapter on just maintaining the deal and maintaining communications with investors; that’s something I’ve learned a lot from you, Joe, to put the spotlight on you – on investor relations during the ownership of the deal; that’s a chapter in itself.

Then in the end we talk about, like I said, unwinding the deal, which is getting these folks the money back. I think that those two sections – unwinding the deal and the day-to-day maintenance of the deal and day-to-day maintenance of your investor database is something that many investors forget about. They’re so focused on finding the opportunity, finding the money, but that’s only like a third of the battle. There’s the other two thirds where the real success is and real longevity is created.

Joe Fairless: In terms of the cash providers looking in their own network, any practical tips for the Best Ever listeners who can then go within their own network? Assuming they qualify for raising private capital based on your prerequisites.

Matt Faircloth: Of course. Here’s what I think – too many people are gonna get stuck, like “I don’t know any millionaires” or “I’m not a member of a country club”, or “I don’t know people that are big-time real estate folks that want to pump lots of equity in.” What people don’t realize is there are cash providers that have access to quite a bit of capital that might not even know that they have it.

The biggest source that I think is an untapped source in America is retirement accounts. So if you have a listener right now that has someone that’s in their circle that used to work at a great job and now works at another job, and when they worked at job A, they had some sort of retirement program (a 401K); when they moved over to job B, that 401K is now able to get rolled into an IRA. Once it’s an IRA, it can then get held with a self-directed IRA custodian. That custodian then allows that potential cash provider to direct that money wherever they want it to go. They can buy gold with it, they can buy stocks, if they want, they can buy mutual funds, just like they were doing with their 401K account… They can also lend money on real estate, and they can invest in partnerships. So they can direct that capital in a lot of different directions.

So what deal providers don’t realize is a lot of people job-hop these days, and the concept of someone working for one company for 30 years is pretty much gone. Most people rotate companies every 5-7 years, so it’s a matter of just looking at your Rolodex and thinking like “Yeah, uncle John and aunt Sally, and that guy I went to high school with (or whatever), they all used to work at this company. Now they’re over at this company, so they may be able to invest their retirement accounts in real estate”, and being able to show them the benefits of such.

The book talks about how to have those conversations once you’ve identified these people.

Joe Fairless: Incredibly valuable. When we talk about private money and raising private money, is there anything as it relates to that topic that we haven’t touched on during this conversation that you think we should?

Matt Faircloth: I can’t stress enough how much of a custodian the deal providers are. There’s a certain level of personal responsibility that you have, so I think that there’s a gut check that your listeners have to have before they go out and start raising money… Like, “Am I really prepared to go and take six figures from somebody and put it to work in my business, and be confident enough that I can return that capital to them safely and with a return to it?”

There’s a certain gut check, look yourself in the mirror that you’ve gotta do, which I go through in the book as well; it’s about the person you have to be to be able to do this. Again, looking at yourself in the mirror – I think everybody can do this, but about looking yourself in the mirror and making sure that you have the tools in yourself to be able to do this and feel like you’ve got the integrity and you’ve got the wherewithal to be a financial custodian for others. Once you feel that way, then you can go out and do it.

Joe Fairless: How can the Best Ever listeners buy your book and get in touch with you?

Matt Faircloth: They can find it on Amazon once it gets released there. It comes out on Bigger Pockets on July 26th. If this is after July 26th, they can go to BiggerPockets.com/store and they can get a copy of the book there. If they pick it up quickly, there is a bunch of bonus material that Bigger Pockets and I put together for the book, including an interview with my SEC attorney, including a roadmap that they can go along with as they’re reading the book to take them through their first deal… And I also wrote another eBook on doing your first apartment building deal. That’s in there, as well. Bigger Pockets even has a webinar too, that’s with just me and the folks who sign up for it if you buy the book and sign up for that, as well.

To participate in all of those things, you have to buy the book fairly soon after it comes out, so let’s say before mid-August, if you’re listening to this, then check it out; go to biggerpockets.com/privatemoneybook, or biggerpockets.com/store and pick it up. But check it out either way.

Joe Fairless: Awesome. I’m very familiar with your book, because you asked me to write the foreword in it, and I was very honored by you asking me. I checked it out, and I wrote the foreword in it…

Matt Faircloth: I’m very grateful you did it, because on a personal note, something we talk about in the book is about being a thought leader, and about being a champion for the industry that you’re in, and being a voice that kind of moves your industry forward in that; that’s something I talk about in the book… But that concept, and the seed that got planted in my head to take my YouTube page to the next level years ago came from you. You planted that seed, and now our YouTube channel has as of today about 11,000 subscribers and it had maybe like a couple hundred when you planted that seed… So I’m very grateful, and that’s the least I could do to get you, who planted a lot of the ideas that are in that book, in my head, so… It just was very fitting for you to write the foreword, so I appreciate you doing that, too.

Joe Fairless: My pleasure, and congrats on the book. Looking forward to the Best Ever listeners checking it out. Thanks again for being on the show, talking about one practical way to find cash providers in our own network – that’s self-directed IRA accounts; think about people who have job-hopped, had a good job and then went to another job… They can roll their 401K into an IRA, and that can be converted into a self-directed IRA.

Clearly, there’s gonna be some education involved there with them, but that is a goldmine for a lot of listeners who know individuals whose scenario that fits.

And then also why it’s important to know about raising private capital – well, you make more money, because you do bigger deals, and bigger deals create scalability; then you can make more money along the way, and so can your investors.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.